Drop-off in deal activity in 2016 set to continue this year: Baker McKenzie

US dollar notes. Photo: Hemant Mishra/Mint

Deal making activity slowed sharply around the world in 2016 amid economic and political uncertainty and the trend is expected to continue into 2017, at least till the first quarter. Deal transactions are expected to drop this year to $2.5 trillion when compared to $2.8 trillion in 2016, a recent report said.

Around the world, investors are likely to remain apprehensive about deal making into 2017 amid major uncertainties about the new relationship between the UK and Europe, and US and rest of the world, according to the Global transactions Forecast issued by law firm, Baker McKenzie in association with Oxford Economics.

In fact, Asia Pacific is no different as the report suggests that deal values will be lower in the region too — at $566 billion in 2017 in the backdrop of a slowing Chinese economy and concerns about the regions trade prospects.

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2016 was marred by a risk of a sharp economic slowdown in China, political and financial turmoil in oil-producing emerging markets, the UK’s decision to leave the EU, and the build-up to the US election. As a result of these conditions, Oxford Economics estimates that the global economy grew just 2.3 per cent in 2016 — the slowest rate since 2009.

The report that was released on Monday notes that “looking ahead, several of these uncertainties will persist into 2017,” thus impacting the deal making activity as well.

Asia Pacific maintains appetite for acquisitions

Despite recent volatility, Asia Pacific companies still have a strong appetite for acquisitions, which is expected to spur a resurgence of deal making in the region in 2018 and 2019.

Asia Pacific also remains an attractive target for foreign buyers looking to gain a foothold in economies with faster growth potential than in other markets.

M&A values in the region is expected to drop to $566 billion in 2017, down from $681 billion in 2016. In fact, total M&A values in Asia Pacific is expected to rise to $676 billion in 2018, and $727 billion in 2019, before easing thereafter.

However, moving into 2017, dealmakers in Asia Pacific will remain wary of the possibility that the new US administration will impose trade tariffs on China and the impact that could have on the Chinese economy.

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“But assuming the new administration’s policies will be more moderate, we expect a more stable M&A landscape to emerge in the next three years as Asian corporations retain their strong appetite for acquisitions and foreign investors remain eager to invest in the region,” said the report.

Domestic IPO activity in Asia Pacific dropped to $47.5 billion in 2016, down from $58.6 billion in 2015. Although, looking ahead, more stable financial conditions and rebounding world trade should encourage a renewed upturn starting in 2018, with regional proceeds expected to rise to $83.5 billion by 2019.

China keeps its spot as front runner for outbound deals

As Asia continues to become a strong originator of outbound deals, Chinese buyers are likely to focus on the services sectors, rather than industrial and raw materials/energy sectors that have driven industrial growth in the past two decades.

The Chinese government’s recent proposals for greater scrutiny of outbound capital flows from China could pose a risk to this process. But the measures appear to be motivated by a desire to stabilize capital outflows and the exchange rate rather a fundamental shift in government-backed investment strategy.

For example, the most restrictive measures the government has proposed apply to outward investment of $10 billion or more, which would not have impeded any outbound M&A deals in 2016.

Moreover, the government’s proposal to apply greater scrutiny to deals between $1 billion and $10 billion only applies if a Chinese acquirer is seeking to invest in a company outside of its industry or supply chain.

“Thus if implemented, we do not expect these measures to have a significant impact on our forecast,” said the report.

Meanwhile, China is also expected to be a key center of domestic IPO activity will which is expected to peak at $34.6 billion in 2019 along with Japan, at $13.8 billion the same year.

India is forecast to continue to grow in importance within the region, peaking at an IPO value of 4.8 billion in 2019.

Sector trends in deal making

From a sector perspective, the diversity of Asia Pacific’s economies means that trends in numerous industries will drive future deal making. These include the need for consolidation in the raw materials sectors, particularly in Australia and Indonesia, as energy and mining companies adapt to a new era of slower global demand growth and lower prices.

It also includes the need for China to eliminate space capacity in heavy industry such as steel, plus a boost in healthcare investment in more advanced Asia Pacific countries to care for aging populations.

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Nevertheless, globally, technology enjoyed a robust 2016, with M&A values rising to $371 billion, up from US$350 billion in 2015. This reflects both the ongoing strength of deal making in traditional technology and new technology’s increasing reach across the wider economy.

“Looking ahead we expect the new tech trend to become a more prominent driver of total deal activity, as banks and other financial institutions try to limit their exposure to fintech firms, and incumbent firms in other sectors aim to avoid being left behind by innovations such as the sharing economy and the Internet of Things,” the report noted.

Tech M&A is expected to rise to $415 billion in 2018 — the highest level since 2000 — before gradually easing in 2019 and 2020. On the other hand, telecoms M&A will rise to $150 billion in 2017 and $193 billion in 2018 before dropping gradually in 2019 and 2020.

The road beyond 2017

“Our forecast shows transactional activity rebounding in 2018 in developed markets, and a year later in emerging markets,” said the report.

The forecast predicts that global M&A deals will drop slightly from $2.7 trillion in 2016 to $2.5 trillion in 2017, then peak at $3 trillion in 2018 while global aggregates for M&A will drop slightly in 2019 and 2020, as US interest rates approach equilibrium, and global equity valuations start to cool.

In fact, the global IPO activity will follow a similar trajectory, with total proceeds more than doubling from $131 billion in 2016 to a peak of $275 billion in 2018 and 2019.

“We expect IPO activity to rise modestly in 2017 and bounce back in 2018 and 2019 as companies that had postponed their listings return to public markets,”the report said.

Another factor likely to support an IPO recovery is the number of countries looking to list state-owned companies to raise money, particularly in Central and Eastern Europe, Commonwealth of Independent States, Middle East and Africa, it added.

“Barring further shocks to confidence, investor focus will shift from short-term uncertainty towards the longer-term needs of households and businesses. Value will become more apparent in sectors such as energy and industrials that have seen the greatest falls in prices,” said the report in its concluding remarks.

With massive cash reserves sitting on corporate balance sheets and private equity dry powder near record levels, investors will have the firepower they need to pursue acquisitions, it noted.

Also Read:

India: Sebi tightens M&A norms in bid to make listing process more transparent

2016 Review: Vietnam’s retail sector sees big-ticket M&As

Asia 2016: China shines in global M&A scene, India emerges bright spot

Mid-market deals dominate M&A activity in Asia-Pacific in 2016

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.